The recent decline in earnings growth estimates for the second quarter is in alignment with negative guidance given by companies, reports Thomson Reuters.


Greg Harrison of Thomson Reuters in the earnings roundup report for the second quarter observes there have been 96 negative pre-announcements and only 14 positive ones among the S&P 500 companies making pre-announcements.

Conservative Earnings Estimates

With the first S&P 500 companies starting to report their second-quarter results, Greg Harrison feels the earnings estimates will be conservative in an environment of low expectations.

Thomson Reuters’ report comes on top of earlier reports from various analysts expecting negative results from S&P companies. For instance, CNBC’s Alex Rosenberg reports that their compilation of the data indicates that 81 percent of the guidance given by S&P 500 (INDEXSP:.INX) companies for the second quarter of the year has been negative.

Greg Harrison notes based on current trends, analysts expect earnings of S&P 500 companies to grow by 3.4 percent over last year’s second quarter. However, on the revenue front, the estimates are still gloomier with only 1.9 percent growth anticipated.

The low estimates from analysts mirror the negative guidance provided by companies. For instance, there have been 96 negative pre-announcements, while the positive pre-announcements account for mere 14 percent.

Justifying his rationale for such a pessimistic view, Greg Harrison throws light on the gloomy scenario with the help of the following graph that plots Q2 growth rate estimate trend and weekly pre-announcements (right axis):

TR Growth estimates

As seen above, the negative guidance provided by companies have outnumbered positives by several times during the past over one month.

Sectoral View

In terms of sector, materials sector contributed the maximum fall in its estimated growth rate throughout the quarter. The materials sector’s growth rate fell 13.8 percentage points to the current -2.9 percent. Companies operating in the materials sector provided seven negative pre-announcements, while two provided positive pre-announcements. The economic slowdown has hurt the sector’s earning, with its sub-industry steel expected to post a substantial 74 percent decline in its earnings. Analysts anticipate diverse metals and mining and gold sub-industries would post double-digit decline in their earnings.

Greg Harrison feels companies operating in the industrials sector too saw its growth estimates falling by 4.5 percentage points, since the beginning of the second quarter in April. The slow industrial activity in the Chinese market is considerably hurting earnings in the sector. Such reduction in earnings is visible in construction and farm machinery and heavy trucks sub-industry.

Interestingly, Greg Harrison observes the consumer discretionary sector posting 6 percent earnings growth. This sector has the third-highest expected earnings growth of the 10 sectors for the second quarter. Companies operating in consumer discretionary sector have sounded more bearish than the analysts on the earnings front. Retailers have provided the majority of negative pre-announcements.

Within retailers, computer and electronic retailers expect to post a staggering 60 percent earnings decline. However, analysts anticipate marginal shrinkage in the profits at departmental stores and general merchandise retailers. The retailers operating in Internet, home improvement and apparel industries, however, anticipate double-digit positive growth rates.

As reported earlier, Greg Harrison of Thomson Reuters has provided a detailed report on the negative pre-announcements made by various industries.